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Revenue is earned when the earnings process is substantially complete. Revenue is realized when goods and services are exchanged for cash or claims to cash. Revenue is realizable when assets received are convertible into a known amount of cash.
at the date of sale (date of delivery). Revenue from services is recognized when services are performed and are billable. Revenue from the use of enterprises assets by others is recognized as time passes or as the assets are used up. Revenue from disposal of assets (other than inventory) is recognized at the point of sale as gain or loss.
Percentage-of-Completion: Steps
1 Costs incurred to date = Percent complete Most recent estimated total costs
2 Estimated total revenue x Percent complete = Revenue to be recognized to date 3 Total revenue to be recognized to date less Revenue recognized in PRIOR periods = Current period revenue 4 Current Period Revenue less current costs = Gross profit
Percentage-of-Completion: Entries
Cost of construction:
Construction in process (CIP) Materials, cash, payables, etc.
Progress billings:
Accounts receivable Billings on CIP
Collections:
Cash
Accounts receivable
Percentage-of-Completion: Entries
To recognize revenue and gross profit:
Construction in process (gross profit) Construction expenses Revenue
Percentage-of-Completion: Example
Data: Contract price: $4,500,000 Start date: July, 2003 Balance sheet date: Given: 2003 Estimated cost: $4,000,000 Finish: October, 2005 Dec. 31 2004
$2,916,000 $1,134,000 $2,400,000 $1,750,000
2005
$4,050,000 $ -0$1,200,000 $2,000,000
Costs to date $1,000,000 Estimated costs to complete $3,000,000 Progress Billings during year $900,000 Cash collected during year $750,000
What is the percent complete, revenue and gross profit recognized each year?
Percentage-of-Completion: Example
2003
% complete to-date Revenue recognized
2004
2005
100 %
1,000,000 = 25% 2,916,000= 72% 4,000,000 4,050,000 4,500,000 * 25% = 1,125,000 1,125,000 less 1,000,000 = 125,000
4,500,000 * 72% 4,500,000 less 1,125,000 less 3,240,000 = 2,115,000 = 1,260,000 2,115,000 less 1,916,000 = 199,000 1,260,000 less 1,134,000 = 126,000
If cash is received prior to delivery, the method used is the deposit method.
in periods of collection rather than at point of sale. Title does not pass to the buyer until all cash payments have been made to the seller. Both sales and cost of sales are deferred to the periods of collection. Other expenses, selling and administrative, are not deferred.
2005
$240,000 $168,000 $ 72,000
Installment sales $200,000 Cost of sales $150,000 Gross Profit $ 50,000 Cash received in: from 2003 sales $ 60,000 from 2004 sales $ -0from 2005 sales $ -0-
The Installment Sales Method: Partial Journal Entries (2003) for Gross Profit
Installment Sales 200,000 Cost of Sales 150,000 Deferred Gross Profit, 2003 50,000 (To close 2003 accounts) Deferred Gross Profit, 2003 15,000 Realized Gross Profit 15,000 (Realized: $60,000 x 25%) Realized Gross Profit 15,000 Income Summary 15,000 (To close to Income Summary)